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Release

TransGlobe Energy Corporation Second Interim Report for the Three and Six Months Ended June 30, 2006

CALGARY, ALBERTA--(CCNMatthews - Aug. 1, 2006) - TransGlobe Energy Corporation (TSX:TGL) (AMEX:TGA) ("TransGlobe" or the "Company") is pleased to announce its financial and operating results for the three and six month periods ended June 30, 2006. All dollar values are expressed in United States dollars unless otherwise stated. Conversion of natural gas to oil is made on the basis of 6,000 cubic feet of natural gas being equivalent to one barrel of crude oil.

HIGHLIGHTS

- $7.2 million net income in Q2-2006 ($0.12 per share).

- $12.4 million cash flow from operations in Q2-2006 ($0.20 per share).

- 2006 capital program increased to $54 million from $45 million.

- Godah early production and development project approved, Block 32.

- Eight wells drilled in Canada in Q2-2006, 5 oil, 3 gas.

Corporate Summary

The Company's total production during the second quarter of 2006 averaged 4,915 Boepd, a 6% increase from the second quarter of 2005 (4,658 Boepd) and a 2% decrease from Q1-2006. The Canadian production increased with the pipeline tie-in of four new wells. Block S-1 production increased over the same period in 2005 due to the additional producing wells in the An Nagyah field and the pipeline connection to the export system. In Block 32 the Tasour field production was lower because of natural declines and because production was restricted due to limited water handling capacity. A facility expansion is underway at the Tasour Central Production Facility ("CPF") to increase water handling capacity and to prepare for production from the Godah discovery.



FINANCIAL AND OPERATING UPDATE

($000's except per share, price and volume amounts)

Three Months Six Months
Ended June 30 Ended June 30
Financial 2006 2005 Change 2006 2005 Change
------------------------------------------------------------------------
------------------------------------------------------------------------
Oil and gas revenue 31,238 17,911 74% 53,969 36,774 47%
Oil and gas revenue,
net of royalties 18,600 11,778 58% 33,908 25,322 34%
Operating expense 2,793 2,371 18% 4,627 4,822 (4)%
General and administrative
expense 951 525 81% 1,707 1,258 36%
Stock-based compensation 314 99 217% 588 450 31%
Depletion, depreciation and
accretion expense 4,838 3,768 28% 8,668 7,702 13%
Income taxes 2,432 1,544 58% 4,050 3,125 30%
Cash flow from
operations(2) 12,356 7,263 70% 23,653 16,331 45%
Basic per share 0.21 0.13 0.40 0.28
Diluted per share 0.20 0.12 0.39 0.27
Net income 7,246 3,474 109% 14,103 7,980 77%
Basic per share 0.12 0.06 0.24 0.14
Diluted per share 0.12 0.06 0.23 0.13
Capital expenditures 11,698 8,605 36% 22,184 12,245 81%
Working capital 10,629 7,784 37% 10,629 7,784 37%
Common shares outstanding
Basic (weighted average) 58,671 57,741 2% 58,599 57,497 2%
Diluted (weighted average) 60,564 60,084 1% 60,613 60,076 1%

Production and Sales Volumes
------------------------------------------------------------------------
------------------------------------------------------------------------
Total production
(Boepd) (6:1)(1) 4,915 4,658 6% 4,970 4,772 4%
Total sales
(Boepd) (6:1)(1) 5,522 4,375 26% 5,021 4,678 7%
Oil and liquids (Bopd) 4,787 3,835 25% 4,299 4,096 5%
Average price
($ per barrel) 66.30 46.05 44% 63.04 44.46 42%
Gas (Mcfpd) 4,408 3,243 36% 4,335 3,494 24%
Average price ($ per Mcf) 5.83 6.22 (6)% 6.22 5.99 4%
Operating expense
($ per Boe) 5.56 5.96 (7)% 5.09 5.69 (11)%


(1) The differences in production and sales volumes result from
inventory changes at Block S-1, Yemen
(2) Cash flow from operations is a non-GAAP measure that represents cash
generated from operating activities before changes in non-cash
working capital

 


OPERATIONS UPDATE

Block S-1, Republic of Yemen (25% working interest)

Operations and Exploration

During the second quarter of 2006, two horizontal appraisal wells (An Nagyah #21 and #22) were drilled targeting an eastern extension of the lower Lam B pool. An Nagyah #21 was drilled to a depth of 2,101 meters and suspended April 16th as a potential lower Lam B oil producer. The well appears to have intersected an oil bearing section in the start of the horizontal section followed by a separate water bearing Lam B compartment at the end of the horizontal section. The well has been suspended pending additional technical evaluation. The An Nagyah #22 lower Lam B appraisal well was drilled to a total depth of 2,171 meters and has been completed as a Lam B water injection well, having encountered both oil and water bearing sands in the horizontal section. The An Nagyah #21 and #22 wells were both located outside the Lam B field boundary as mapped by TransGlobe. The inconclusive test results had no effect on TransGlobe's Lam B reserves.

Following several weeks of scheduled rig maintenance, the drilling rig was moved to Wadi Bayhan on the western side of the block to drill the first Block S-1 exploration well of the year. Drilling commenced on July 11th at Wadi Bayhan, which is an Alif, Lam and fractured Basement prospect. It is expected to take 40 to 60 days, depending on the number of tests conducted. Following Wadi Bayhan, the rig is scheduled to drill an exploration well south of Wadi Bayhan on an Alif/Lam prospect called Osaylan West.

In addition, the partners approved a large 610 square kilometer 3-D seismic acquisition program on the south/east part of the Block. The 3-D seismic program commenced in mid July and has a planned completion date of July 2007. It is anticipated that the new 3-D seismic program will provide a number of additional exploration prospects for drilling in late 2007 and 2008.

Production

Production from Block S-1 averaged 10,636 Bopd (2,659 Bopd to TransGlobe) during the second quarter of 2006. Production was partially curtailed during April/May due to facility modifications and upgrades in the field. Production from the field is expected to remain at the current 11,000 to 12,000 Bopd level for the balance of 2006 due to gas handling facility constraints. The CPF expansion project to handle additional oil production and associated natural gas is expected to be completed by early 2007.

A feasibility study is in progress to determine the costs and economics of installing production facilities to recover the condensate from the An Naeem discovery. A decision on the project is anticipated in September 2006.



Quarterly 2006 An Nagyah Production (Bopd)
Q-1 Q-2
------------------------------------------------------------------------
Gross field production rate 11,000 10,636
TransGlobe working interest 2,750 2,659
TransGlobe net (after royalties) 1,631 1,467
TransGlobe net (after royalties and tax)(1) 1,423 1,266
------------------------------------------------------------------------
------------------------------------------------------------------------

(1) Under the terms of the Block S-1 PSA royalties and taxes are paid
out of the government's share of production sharing oil

 


Block 32, Republic of Yemen (13.81087% working interest)

Operations and Exploration

Two wells were drilled during the second quarter, resulting in oil wells at Godah #2 and Tasour #21. The Godah #2 appraisal well was drilled to evaluate the extent of the oil accumulation found at the Godah #1 exploration well. Godah #2, located approximately 1,100 meters to the northeast of Godah #1, encountered the Qishn S-1A sands 20 meters structurally lower than at Godah #1. Godah #2 was production tested from a 4.0 meter interval at a stabilized rate of 1,160 barrels of oil per day and 117 thousand cubic feet per day of gas (maximum test pump capacity). The well was subsequently equipped with a larger electrical submersible pump ("ESP") and suspended as a potential oil producer. The well logs and the production test have demonstrated an oil column of at least 23 meters.

The Tasour #21 delineation well was drilled to a total depth of 1,996 meters and completed as a producing Qishn oil well. The well encountered oil bearing upper Qishn S-1A sands in a separate fault segment located south of the Tasour Field. The well was completed and placed on production as a Qishn S-1A oil producer with an initial production rate of 785 Bpd of oil and 2,355 Bpd of water. Production was subsequently increased to 1,200 Bopd with the installation of a larger ESP.

In late June, the drilling commenced on an appraisal/exploration well at Tasour #22. Tasour #22 will appraise a Qishn target offsetting the Tasour #21 oil producer. In addition the well will evaluate a deeper exploration prospect in the Sarr formation. Following Tasour #22, the drilling rig will move to an appraisal well at Godah #3 to further delineate the Godah oil discovery.

A second (larger) drilling rig is scheduled to drill an exploration well at Tasour #23 commencing in August. Tasour #23 is targeting a fractured basement prospect south of the Tasour field.

Production

The Tasour field averaged 8,522 Bopd (1,177 Bopd to TransGlobe) during the second quarter of 2006. Approximately 750+Bopd was shut in during the quarter due to fluid handling and water injection capacity constraints. The CPF fluid handling capacity was increased in April/May and water injection capacity is scheduled to increase through the balance of 2006 as additional injection pumps are installed. It is expected that production from the Tasour field will average approximately 8,000 Bopd for the balance of 2006.

In early June, the partnership approved the development of the recently discovered Godah field. The operator plans to install a temporary early production system and to commence production during the fourth quarter of 2006 at initial rates of 2,000 to 4,000 Bopd (275 to 550 Bopd to TransGlobe). In addition the partnership has approved the construction of the permanent facilities required to develop the Godah field. The development consists of a 14 mile (23 km) 10 inch pipeline to the Tasour CPF and expansion of the Tasour CPF to process the Godah oil. The pipeline and expanded Tasour facilities could be operational by mid 2007.



Quarterly 2006 Tasour Production (Bopd)
Q-1 Q-2
------------------------------------------------------------------------
Gross field production rate 9,427 8,522
TransGlobe working interest 1,302 1,177
TransGlobe net (after royalties) 982 675
TransGlobe net (after royalties and tax)(1) 874 508
------------------------------------------------------------------------
------------------------------------------------------------------------

(1) Under the terms of the Block 32 PSA royalties and taxes are paid out
of the government's share of production sharing oil

 


Block 72, Republic of Yemen (33% working interest)

The 255 km of new 2-D seismic data acquired at the end of 2005 has been processed, along with 500 km of existing 2-D seismic data. Interpretation and mapping is expected to be completed during August 2006. A two well exploration program is scheduled to commence drilling in the fourth quarter of 2006.

Nuqra Block 1, Arab Republic of Egypt (50% working interest, Operator)

The 800 km of 2-D seismic data acquired during the first quarter of 2006 has been processed and interpreted. Mapping is nearing completion, and it is expected that final well locations will be selected and approved by the partnership by early August. TransGlobe has prepared for a two well exploration drilling program, subject to rig availability. Production casing, wellheads and other long lead items have been ordered with deliveries scheduled for early in the fourth quarter. Although not finalized contractually, the Company is optimistic that a suitable drilling rig has been located which could be available to commence drilling in the first Quarter of 2007.

The Company has exceeded the Period One work commitments of $2.0 million and elected to proceed with the first three year extension to the exploration period, effective July 18, 2006. The first three year extension requires a mandatory relinquishment of 25% of the Block and completion of a two well drilling program, with a minimum expenditure of $4.0 million over a period of three years. Upon expiry of the first three year extension (July 17, 2009), there is an option to proceed with a second three year extension and work program. The second exploration extension requires a mandatory relinquishment of 25% of the original Block and completion of a two well drilling program, with a minimum expenditure of $5.0 million over a final three year term. Exploitation of discovered commercial fields will continue under a Development Lease for a further 20 years.

The Company has received approval of the first exploration extension and the proposed area for relinquishment. The area relinquished was considered non-prospective by the Company. The total area of the Nuqra Block 1 concession is approximately 5.5 million acres following the relinquishment. In addition, TransGlobe has fulfilled the original $6 million farm-in commitment (100%) and will pay 60% of future program expenditures until first production.

Canada

Operations and Exploration

During the second quarter, the Company drilled and cased an additional 8 (6.6 net) wells resulting in 5 oil wells and 3 gas wells. In total, the Company has participated in 16 (11.7 net) wells during 2006, resulting in 5 oil wells, 10 gas wells and 1 dry hole.

To date, 5 gas wells have been completed, tested and are waiting for pipeline connections. Completion and testing work is underway on 6 wells (3 gas and 3 oil). The remaining 4 wells (2 oil and 2 gas) are expected to finish completion and testing work by the end of the third quarter. It is estimated that the 2006 wells drilled to date represent approximately 450 to 550 Boepd of additional production to the Company.

The Company has received approval to drill four coal bed methane ("CBM") wells per section in the Nevis area targeting the Horseshoe Canyon coals. The Company is currently acquiring landowner approvals for an 11 well CBM program at Nevis, which has a targeted commencement date of late August. An additional 3 to 5 wells may be drilled prior to year end to appraise recent oil discoveries in the Nevis area.

Production

Production averaged 1,079 Boepd during the second quarter of 2006. Production during the quarter was partially curtailed in the Nevis and Twining areas by restrictions on the TransCanada pipeline system associated with system maintenance. At Nevis, a new compressor was purchased and is scheduled for installation and startup in the third quarter. The compressor is expected to provide an additional 300 Boepd to the Company from wells currently connected plus additional capacity for the planned CBM program. Work is also proceeding to connect an additional 600 to 800 Boepd of new production drilled in 2006 and late 2005.



Quarterly 2006 Canadian Production (Boepd)
Q-1 Q-2
------------------------------------------------------------------------
TransGlobe working interest 975 1,079
TransGlobe net (after royalties) 798 910
------------------------------------------------------------------------
------------------------------------------------------------------------

 


MANAGEMENT'S DISCUSSION AND ANALYSIS

July 31, 2006

Management's discussion and analysis ("MD&A") should be read in conjunction with the unaudited interim financial statements for the three and six months ended June 30, 2006 and 2005, the audited financial statements and MD&A for the year ended December 31, 2005 included in the Company's annual report. The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in Canada in the currency of the United States (except where indicated as being another currency). Additional information relating to the Company, including the Company's Annual Information Form, is on SEDAR at www.sedar.com.

Forward Looking Statements

This MD&A may include certain statements that may be deemed to be "forward-looking statements" within the meaning of the U.S. Private Securities Litigation Reform Act of 1995. All statements in this interim report, other than statements of historical facts, that address future production, reserve potential, exploration drilling, exploitation activities and events or developments that the Company expects, are forward-looking statements. Although TransGlobe believes the expectations expressed in such forward-looking statements are based on reasonable assumptions, such statements are not guarantees of future performance and actual results or developments may differ materially from those in the forward-looking statements. Factors that could cause actual results to differ materially from those in forward-looking statements include, but are not limited to, oil and gas prices, well production performance, exploitation and exploration successes, continued availability of capital and financing, and general economic, market or business conditions.

Non-GAAP Measures

This document contains the term "cash flow from operations", which should not be considered an alternative to, or more meaningful than "cash flow from operation activities" as determined in accordance with Generally Accepted Accounting Principles (GAAP). Cash flow from operations is a non-GAAP measure that represents cash generated from operating activities before changes in non-cash working capital. We consider this a key measure as it demonstrates our ability to generate the cash flow necessary to fund future growth through capital investment. Cash flow from operations may not be comparable to similar measures used by other companies.

Net operating income is a non-GAAP measure that represents revenue net of royalties and operating expenses. Management believes that net operating income is a useful supplemental measure to analyse operating performance and provide an indication of the results generated by the Company's principal business activities prior to the consideration of other income and expenses. Net operating income may not be comparable to similar measures used by other companies.

Use Of Boe Equivalents

The calculations of barrels of oil equivalent ("Boe") are based on a conversion rate of six thousand cubic feet of natural gas to one barrel of crude oil. Boe may be misleading, particularly if used in isolation. A Boe conversion ratio of 6 Mcf:1 Bbl is based on an energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead.

OUTLOOK

TransGlobe has projected a 2006 capital budget of $54 million, which increased from the original budget of $45.3 million due to an increase in the seismic and facility work planned for Block S-1 and the Godah development on Block 32.

- In the first six months of 2006, the Company spent $22.2 million of the capital budget.

TransGlobe has projected production volumes for 2006 to average from 5,300 to 5,600 Boepd.

- Production volumes were 4,970 Boepd in the first six months of 2006.

Production increases in the third and fourth quarters are anticipated from the startup of the Godah field on Block 32 and from Canada when pipeline connections for new wells and a compressor installation at Nevis are completed. The anticipated production increases are expected to bring the 2006 average production up to the target levels and result in an exit production rate near 6,000 Boepd.

TransGlobe has projected cash flow from operations for 2006 to be between $43 and $45 million based on an average dated Brent oil price of $55.00/Bbl and an average AECO gas price of C$7.50/Mcf. As of July 31, 2006 the Company expects to exceed this target due to high oil prices experienced in the first seven months of 2006. The gas prices realized during the first seven months of 2006 are lower than TransGlobe's budgeted number of C$7.50; however natural gas production represents only 15% of the Company's total production and therefore has a small effect on cash flow.

- Cash flow from operations in the first six months of 2006 was $23.7 million.



SELECTED QUARTERLY FINANCIAL INFORMATION

2006 2005
------------------------------------------------------------------------
($000's, except per share, price
and volume amounts) Q-2 Q-1 Q-4 Q-3 Q-2
------------------------------------------------------------------------
Average production volumes
(Boepd)(1) 4,915 5,026 5,132 5,285 4,658
Average sales volumes
(Boepd)(1) 5,522 4,515 4,935 5,533 4,375
Average price ($/Boe) 62.17 55.93 54.58 56.57 44.99

Oil and gas sales 31,238 22,730 24,781 28,796 17,911
Oil and gas sales, net of
royalties 18,600 15,308 14,442 19,147 11,778

Cash flow from operations(2) 12,356 11,297 8,603 13,142 7,263
Cash flow from operations
per share
- Basic 0.21 0.19 0.15 0.23 0.13
- Diluted 0.20 0.19 0.14 0.22 0.12

Net income 7,246 6,857 4,331 7,539 3,474
Net income per share
- Basic 0.12 0.12 0.07 0.13 0.06
- Diluted 0.12 0.11 0.07 0.13 0.06

Total assets 105,816 92,596 86,286 77,576 66,168
------------------------------------------------------------------------
------------------------------------------------------------------------

(1) The differences in production and sales volumes result from
inventory changes at Block S-1, Yemen
(2) Cash flow from operations is a non-GAAP measure that represents cash
generated from operating activities before changes in non-cash
working capital

 


- As budgeted and consistent with prior years, royalties at Block 32, Yemen increased to 43% in Q2-2006 compared to 25% in Q1-2006 resulting in a reduced cash flow from operations for Block 32 in the second quarter. The Block 32 Production Sharing Agreement ("PSA") allows for the recovery of capital costs over a two year period with 50% recovered in the quarter expended and the remaining 50% recovered in the first quarter of the following calendar year through reduced royalties and taxes paid to the government.

Cash flow from operations and net income increased 9% to $12,356,000 and 6% to $7,246,000 respectively, in Q2-2006 compared to Q1-2006 mainly as a result of:

- an 11% increase in average commodity prices;

- a 22% increase in sales volumes due to all the inventory at Block S-1 being sold;

- offset in part by average royalty rates increasing from 33% to 40% and average current tax rates increasing due to Block 32's recovery of 2005 capital costs in Q1-2006.

RESULTS OF OPERATIONS

Cash flow from operations increased by 70% in Q2-2006 compared to Q2-2005 mainly as a result of a 26% increase in sales volumes and a 38% increase in commodity prices.


$ Per Share %
$ 000's Diluted Variance
------------------------------------------------------------------------
Q2-2005 Cash flow from operations(1) 7,263 0.12
------------------------------------------------------------------------
Volume variance 5,424 0.09 75
Price variance 7,903 0.13 109
Royalties (6,505) (0.11) (90)
Expenses:
Operating (422) (0.01) (6)
Cash general and administrative (460) (0.01) (6)
Current income taxes (839) (0.01) (12)
Realized foreign exchange gain (loss) (69) - (1)
Settlement of asset retirement
obligations (9) - -
Other 70 - 1
Change in weighted average number of
diluted shares outstanding - - -
------------------------------------------------------------------------
Q2-2006 Cash flow from operations(1) 12,356 0.20 70
------------------------------------------------------------------------

(1) Cash flow from operations is a non-GAAP measure that represents cash
generated from operating activities before changes in non-cash
working capital

 


Net income increased 109% in Q2-2006 compared to Q2-2005 mainly as a result of the above cash flow from operations increases.



OPERATING RESULTS

Daily Volumes, Working Interest Before Royalties

Three Months Ended Six Months Ended
June 30 June 30
------------------------------------------------------------------------
2006 2005 2006 2005
------------------------------------------------------------------------
Yemen - Oil production Bopd 3,836 3,952 3,943 4,008
- Inventory Change Bopd 607 (283) 51 (92)
------------------------------------------------------------------------
Yemen - Oil sales Bopd 4,443 3,669 3,994 3,916
------------------------------------------------------------------------
Canada - Oil and liquids Bopd 344 166 304 181
- Gas sales Mcfpd 4,408 3,243 4,335 3,494
------------------------------------------------------------------------
Canada Boepd 1,079 706 1,027 762
------------------------------------------------------------------------
Total sales Boepd 5,522 4,375 5,021 4,678
------------------------------------------------------------------------
------------------------------------------------------------------------


Consolidated Net Operating Results
Consolidated
------------------------------------------------------------------------
Six Months Ended Six Months Ended
June 30, 2006 June 30, 2005
------------------------------------------------------------------------
($000's, except per Boe amounts) $ $/Boe $ $/Boe
------------------------------------------------------------------------
Oil and gas sales 53,969 59.38 36,774 43.43

Royalties 20,061 22.07 11,452 13.52
Operating expenses 4,627 5.09 4,822 5.69

------------------------------------------------------------------------
Net operating income(1) 29,281 32.22 20,500 24.22
------------------------------------------------------------------------
------------------------------------------------------------------------

Consolidated
------------------------------------------------------------------------
Three Months Ended Three Months Ended
June 30, 2006 June 30, 2005
------------------------------------------------------------------------
($000's, except per Boe amounts) $ $/Boe $ $/Boe
------------------------------------------------------------------------
Oil and gas sales 31,238 62.17 17,911 44.99
Royalties 12,638 25.15 6,133 15.41
Operating expenses 2,793 5.56 2,371 5.96
------------------------------------------------------------------------
Net operating income(1) 15,807 31.46 9,407 23.62
------------------------------------------------------------------------

(1) Net operating income amounts do not reflect Yemen income tax
expense which is paid through oil allocations with the Ministry of
Oil and Minerals ("MOM") in the Republic of Yemen (Q2-2006 -
$2,532,000, $5.04/Boe, Q2-2005 - $1,693,000, $4.25/Boe), (Q1 and
Q2-2006 - $4,020,000, $4.42/Boe, Q1 and Q2-2005 - $3,067,000,
$3.62/Boe).


 


Segmented Net Operating Results

In 2006 the Company operated in two geographic areas, segmented as the Republic of Yemen and Canada. Also, the Company has start-up operations in a third geographic segment, Arab Republic of Egypt. MD&A will follow under each of these segments.



Republic of Yemen
Six Months Ended Six Months Ended
June 30, 2006 June 30, 2005
------------------------------------------------------------------------
($000's, except per Boe amounts) $ $/Boe $ $/Boe
------------------------------------------------------------------------
Oil sales 46,114 63.78 31,609 44.60
Royalties 18,736 25.92 10,598 14.95
Operating expenses 3,174 4.39 3,952 5.58
------------------------------------------------------------------------
Net operating income(1) 24,204 33.47 17,059 24.07
------------------------------------------------------------------------
------------------------------------------------------------------------

Three Months Ended Three Months Ended
June 30, 2006 June 30, 2005
------------------------------------------------------------------------
($000's, except per Boe amounts) $ $/Boe $ $/Boe
------------------------------------------------------------------------
Oil sales 27,110 67.05 15,413 46.17
Royalties 11,989 29.65 5,757 17.24
Operating expenses 1,961 4.85 1,901 5.70
------------------------------------------------------------------------
Net operating income(1) 13,160 32.55 7,755 23.23
------------------------------------------------------------------------
------------------------------------------------------------------------

(1) Net operating income amounts do not reflect Yemen income tax expense
which is paid through oil allocations with MOM in the Republic of
Yemen (Q2-2006 - $2,532,000, $6.26/Boe, Q2-2005 - $1,693,000,
$5.07/Boe), (Q1 and Q2-2006 - $4,020,000, $5.56/Boe, Q1 and Q2-2005
- $3,067,000, $4.32/Boe) .

 


Net operating income in Yemen increased 42% in the first six months of 2006 compared to the same period of 2005 primarily as a result of the following:

- Oil sales increased 47% mainly as a result of the following:

1. Oil prices increased by 43%.

2. Sales volumes increased 2% primarily as a result of production increases at Block S-1 offset by decreases on Block 32 due to natural declines and CPF fluid handling and facility constraints.




Daily Volumes,
Working Interest Six Months Ended Six Months Ended
Before Royalties June 30, 2006 June 30, 2005
------------------------------------------------------------------------
Bopd Bopd Change
------------------------------------------------------------------------
Block S-1 - production 2,704 1,937 40
- inventory change 51 (92) -
------------------------------------------------------------------------
Block S-1 - sales 2,755 1,845 49
Block 32 - sales 1,239 2,071 (40)
------------------------------------------------------------------------
Total sales 3,994 3,916 2
------------------------------------------------------------------------
------------------------------------------------------------------------


Daily Volumes,
Working Interest Three Months Ended Three Months Ended
Before Royalties June 30, 2006 June 30, 2005
------------------------------------------------------------------------
Bopd Bopd Change
------------------------------------------------------------------------
Block S-1 - production 2,659 2,041 30
- inventory change 607 (283) -
------------------------------------------------------------------------
Block S-1 - sales 3,266 1,758 86
Block 32 - sales 1,177 1,911 (38)
------------------------------------------------------------------------
Total sales 4,443 3,669 21
------------------------------------------------------------------------
------------------------------------------------------------------------

 


- Royalty costs increased 77%. Royalties as a percentage of revenue (royalty rate) increased to 41% in the first six months of 2006 compared to 34% in the first six months of 2005. This was a result of an increase in Block S-1 royalty rate due to recovery of the Company's historical exploration cost pools at the end of Q3-2005. Royalty rates fluctuate in Yemen due to changes in the amount of cost sharing oil, whereby the Block 32 and Block S-1 PSA's allow for the recovery of operating and capital costs through a reduction in MOM take of oil production as discussed below:

1. Block 32:

-- Operating costs are recovered in the quarter expended.

-- Capital costs are amortized over two years with 50% recovered in the quarter expended and the remaining 50% recovered in the first quarter of the following calendar year. As a result, the Company will receive a larger share of production in the first quarter of each year as 50% of the previous year's historical costs are recovered.

-- In Q1-2006, the Company's royalty rate was 25% compared to 30% in Q1-2005.

-- In Q2-2006, the Company's royalty rate was 43% compared to 45% in Q2-2005.

-- The Company's royalty rate is expected to be between 41% to 45% for the balance of the year depending upon production volumes, oil prices, operating costs and eligible capital expenditures.

2. Block S-1:

-- Operating costs are recovered in the quarter expended.

-- New capital costs are amortized over eight quarters with one eighth (12.5%) recovered each quarter.

-- Historical exploration costs, which consist of the costs expended before the Contractor declared commerciality of the Block, are recovered on a "last in, first out" basis.

-- In Q1-2005, the Company's royalty rate was 30%. At the end of Q3-2005, the Company had recovered its historical exploration cost pools which resulted in an increase of the royalty rate to 42% in Q1-2006 and 45% in Q2-2006.

-- For the balance of 2006, the Company's royalty rate is expected to average between 38% and 46% depending upon production volumes, oil prices, operating costs and eligible capital expenditures.

- Operating expenses on a Boe basis decreased 21% mainly as a result of the following:

1. Block 32 operating expenses averaged $4.21 per barrel in the first six months of 2006 compared to $5.03 per barrel in the first six months of 2005 primarily due to decreased diesel costs. A diesel topping plant was constructed in 2005 to manufacture diesel from produced crude oil which will reduce diesel costs significantly on a go forward basis. The plant became operational in December 2005.

2. Block S-1 operating costs averaged $4.47 per barrel in the first six months of 2006 compared to $5.90 per barrel in the first six months of 2005. This reduction is a reflection of increased production volumes and of commissioning of the pipeline in June 2005.



Canada
Six Months Ended Six Months Ended
June 30, 2006 June 30, 2005
------------------------------------------------------------------------
($000's, except per Boe amounts) $ $/Boe $ $/Boe
------------------------------------------------------------------------
Oil sales 1,353 59.18 823 46.56
Gas sales ($ per Mcf) 4,881 6.22 3,788 5.99
NGL sales 1,580 48.98 527 35.25
Other sales 41 - 27 -
------------------------------------------------------------------------
7,855 42.25 5,165 37.42
Royalties 1,325 7.13 854 6.18
Operating expense 1,453 7.82 870 6.30
------------------------------------------------------------------------
Net operating income 5,077 27.30 3,441 24.94
------------------------------------------------------------------------
------------------------------------------------------------------------

Three Months Ended Three Months Ended
June 30, 2006 June 30, 2005
------------------------------------------------------------------------
($000's, except per Boe amounts) $ $/Boe $ $/Boe
------------------------------------------------------------------------
Oil sales 801 64.35 401 48.53
Gas sales ($ per Mcf) 2,338 5.83 1,834 6.22
NGL sales 972 51.54 253 37.31
Other sales 17 - 10 -
------------------------------------------------------------------------
4,128 42.06 2,498 38.89
Royalties 649 6.62 376 5.85
Operating expense 832 8.47 470 7.30
------------------------------------------------------------------------
Net operating income 2,647 26.97 1,652 25.74
------------------------------------------------------------------------
------------------------------------------------------------------------

 


Net operating income in Canada increased 48% in the six months ended June 30, 2006 compared to the same period of 2005 primarily as a result of the following:

- Sales increased 52% mainly as a result of the following:

1. Sales volumes increased 35% as a direct result of successful drilling in 2005.

2. Commodity prices increased 13% on a Boe basis.

- Royalty costs increased 15% on a Boe basis. Royalties as a percent of revenue were consistent at 17% in the six months ended June 30, 2006 compared to the same period of 2005.

- Operating costs increased 24% on a Boe basis mainly as a result of three well workovers at Nevis and overall general increases to all services due to a very competitive oil and gas environment in Canada.

COMMODITY CONTRACTS

TransGlobe uses hedge arrangements as part of its risk management approach to manage commodity price fluctuations and stabilize cash flows for future exploration and development programs.

During the third quarter 2005 the Company entered into a crude oil costless collar for 15,000 barrels per month from January 1, 2006 to December 31, 2006. The transaction consisted of the purchase of a $50.00 per barrel dated Brent put (floor) and a $77.93 per barrel dated Brent call (ceiling). Pursuant to Canadian generally accepted accounting principles, the Company has fair valued these hedge transactions. As at June 30, 2006, the estimated fair value of the unrealized hedge transactions is a liability of $134,000, which results in an unrealized $217,000 loss being recorded to the income statement for the six months ended June 30, 2006.

The Company will only incur realized gains or losses on these hedge transactions when the dated Brent monthly average oil price is below $50 per barrel and above $77.93 per barrel during the calendar year of 2006, or if the Company sells the contract.



GENERAL AND ADMINISTRATIVE EXPENSES ("G&A")

Six Months Ended Six Months Ended
June 30, 2006 June 30, 2005
------------------------------------------------------------------------
($000's, except Boe amounts) $ $/Boe $ $/Boe
------------------------------------------------------------------------
G&A (gross) 2,927 3.22 2,210 2.62
Capitalized G&A (1,062) (1.17) (874) (1.04)
Overhead recoveries (158) (0.17) (78) (0.09)
------------------------------------------------------------------------
G&A (net) 1,707 1.88 1,258 1.49
------------------------------------------------------------------------
------------------------------------------------------------------------

Three Months Ended Three Months Ended
June 30, 2006 June 30, 2005
------------------------------------------------------------------------
($000's, except Boe amounts) $ $/Boe $ $/Boe
------------------------------------------------------------------------
G&A (gross) 1,581 3.15 1,084 2.73
Capitalized G&A (536) (1.07) (504) (1.27)
Overhead recoveries (94) (0.19) (55) (0.14)
------------------------------------------------------------------------
G&A (net) 951 1.89 525 1.32
------------------------------------------------------------------------
------------------------------------------------------------------------

 


General and administrative expenses increased 36% (26% increase on a sales Boe basis) in the first six months of 2006 compared to the same period of 2005 as a result of the following:

- Personnel and office overhead costs increased due to additional staff.

- Public company costs increased mainly due to the Company preparing for the new Sarbanes Oxley compliance requirements.

- Capitalized general and administrative expenses increased mainly as a result of expansion in the Egypt operations and overhead recoveries increased due to the increased capital activity in Canada.

- The strengthening of the Canadian dollar against the United States dollar increased net G&A costs by $0.10 per Boe through currency conversion.

STOCK-BASED COMPENSATION

Effective January 1, 2004 the Company adopted the new accounting standard of the Canadian Institute of Chartered Accountants ("CICA") section 3870, "Stock-based Compensation and Other Stock-based Payments". This Canadian accounting standard requires the Company to record a compensation expense over the vesting period based on the fair value of options granted to employees and directors. Non-cash stock-based compensation expense amounted to $588,000 in the first six months of 2006 compared to $450,000 in the same period of 2005.

Based on stock option grants to date, it is expected that the effect on the balance of 2006 earnings will be approximately $605,000 with no effect on cash flow from operations.



DEPLETION, DEPRECIATION AND ACCRETION EXPENSE ("DD&A")

Six Months Ended Six Months Ended
June 30, 2006 June 30, 2005
------------------------------------------------------------------------
($000's, except per Boe amounts) $ $/Boe $ $/Boe
------------------------------------------------------------------------
Republic of Yemen 5,278 7.30 6,327 8.93
Canada 3,377 18.17 1,374 9.95
Arab Republic of Egypt 13 - 1 -
------------------------------------------------------------------------
8,668 9.54 7,702 9.10
------------------------------------------------------------------------
------------------------------------------------------------------------


Three Months Ended Three Months Ended
June 30, 2005 June 30, 2004
------------------------------------------------------------------------
($000's, except per Boe amounts) $ $/Boe $ $/Boe
------------------------------------------------------------------------
Republic of Yemen 2,976 7.36 3,082 9.23
Canada 1,853 18.88 685 10.66
Arab Republic of Egypt 9 - 1 -
------------------------------------------------------------------------
4,838 9.63 3,768 9.47
------------------------------------------------------------------------
------------------------------------------------------------------------

 


In Yemen, DD&A on a Boe basis decreased 18% in the first six months of 2006 compared to the same period of 2005 primarily as a result of decreased finding and development costs in Yemen.

In Yemen (Block 72) and Egypt (Nuqra Block 1) major development costs of $2,212,000 and $6,263,000 respectively, were excluded from costs subject to depletion and depreciation in Q2-2006.

In Canada, DD&A on a Boe basis increased 83% in the first six months of 2006 compared to the same period of 2005 primarily as a result of increased finding and development costs in Canada.



INCOME TAXES

Six Months Six Months
Ended Ended
($000's) June 30, 2006 June 30, 2005
------------------------------------------------------------------------
Future income tax 30 58
Current income tax 4,020 3,067
------------------------------------------------------------------------
4,050 3,125
------------------------------------------------------------------------
------------------------------------------------------------------------

 


The future income expense was $30,000 in the first six months of 2006 (Q2-2005 - $58,000) which relates to a non-cash expense for taxes to be incurred in the future as Canadian tax pools reverse.

Current income tax expense in the first six months of 2006 of $4,020,000 (2005 - $3,067,000) represents income taxes incurred and paid under the laws of Yemen pursuant to the PSA on Block 32 and Block S-1. The increase in current taxes is primarily the result of increased sales revenue in Yemen. The income tax expense in Yemen as a percent of revenue was 9% in the first six months of 2006 compared to 10% in the same period of 2005. In Canada, there were no income taxes paid in 2006 or 2005.



CAPITAL EXPENDITURES/DISPOSITIONS

Capital Expenditures

Six Months Ended
------------------------------------------------------------------------
June 30, 2006
------------------------------------------------------------------------
Geological Drilling
Land and and and
($000's) Acquisition Geophysical Completions
------------------------------------------------------------------------
------------------------------------------------------------------------
Republic of Yemen
Block S-1 - 16 3,548
Block 32 - - 2,226
Block 72 - 418 251
------------------------------------------------------------------------
- 434 6,025
Canada 326 34 7,076
Arab Republic of Egypt - 3,053 190
------------------------------------------------------------------------
326 3,521 13,291
------------------------------------------------------------------------
------------------------------------------------------------------------


Six Months Ended
------------------------------------------------------------------------
June 30, 2006 June 30, 2005
--------------------------------------------------------- --------------
Facilities and
($000's) Pipelines Other Total Total
--------------------------------------------------------- --------------
--------------------------------------------------------- --------------
Republic of Yemen
Block S-1 1,908 108 5,580 4,483
Block 32 136 (6) 2,356 2,184
Block 72 - 64 733 7
--------------------------------------------------------- --------------
2,044 166 8,669 6,674
Canada 2,072 63 9,571 4,807
Arab Republic of Egypt - 701 3,944 764
------------------------------------------------------------------------
4,116 930 22,184 12,245
------------------------------------------------------------------------
------------------------------------------------------------------------

 


On Block S-1 in Yemen, the Company drilled four wells (An Nagyah #19, #20, #21 and #22) and continued working on CPF construction and expansion. On Block 32, the Company drilled three wells (Tasour #21 and Godah #1, #2) and started drilling Tasour #22. On Block 72, the Company continued to define drilling leads through seismic acquisition and processing.

In Canada, the Company drilled 16 wells (11.7 net) mainly in the Nevis, Morningside and Thorsby areas. Also, the Company carried out completion and testing work on 13 wells, tied-in four wells and added compression equipment, mainly in the Nevis area.

In Egypt, the Company completed the field seismic acquisition on Nuqra Block 1 on April 5, 2006. The processing of the seismic was completed in July. Interpretation and mapping of the new seismic is underway in order to define drilling locations for the 2006 drilling program.

OUTSTANDING SHARE DATA

Common shares issued and outstanding as at July 31, 2006 are 58,682,439.

LIQUIDITY AND CAPITAL RESOURCES

Liquidity describes a company's ability to access cash. Companies operating in the upstream oil and gas industry require sufficient cash in order to fund capital programs necessary to maintain and increase production and proved reserves, to acquire strategic oil and gas assets and repay debt. TransGlobe's capital programs are funded principally by cash provided from operating activities.

The following table illustrates TransGlobe's sources and uses of cash during the six month periods ended June 30, 2006 and 2005:



Sources and Uses of Cash

Six Months Ended June 30
-------------------------
($000's) 2006 2005
------------------------------------------------------------------------
------------------------------------------------------------------------
Cash sourced
Cash flow from operations(1) 23,653 16,331
Issue of common shares 209 714
Other - -
------------------------------------------------------------------------
23,862 17,045
Cash used
Exploration and development expenditures 22,184 12,245
Other 30 31
------------------------------------------------------------------------
22,214 12,276
------------------------------------------------------------------------
Net cash 1,648 4,769
Increase (decrease) in non-cash working capital 2,809 (2,527)
------------------------------------------------------------------------
Increase in cash and cash equivalents 4,457 2,242
Cash and cash equivalents - beginning of period 12,221 4,988
------------------------------------------------------------------------
Cash and cash equivalents - end of period 16,678 7,230
------------------------------------------------------------------------
------------------------------------------------------------------------
(1) Cash flow from operations is a non-GAAP measure that represents cash
generated from operating activities before changes in non-cash
working capital

 


Funding for the Company's capital expenditures in the second quarter of 2006 was provided by cash flow from operations and working capital.

Working capital is the amount by which current assets exceed current liabilities. At June 30, 2006 the Company had working capital of $10,629,000, zero debt and an unutilized loan facility of $7,000,000. This loan facility has subsequently been increased to a $25,000,000 borrowing base. Accounts receivable decreased primarily due to: decreased revenue in Canada in June 2006 compared to December 2005 due to lower gas price; offset in part by increased revenue in Yemen in June 2006 compared to December 2005 due to higher oil prices and higher sales volumes. There was no inventory at June 30, 2006 since all Block S-1 production had been sold. Accounts payable increased due to higher capital activity in Q2-2006 compared to Q4-2005 in Yemen and Canada.

The Company expects to fund its approved 2006 exploration and development program of $54 million ($22 million incurred to June 30, 2006) through the use of working capital and cash flow. The use of credit facilities or equity financing during 2006 are expected to be utilized only to accelerate existing projects or to finance new opportunities. Fluctuations in commodity prices, product demand, foreign exchange rates, interest rates and various other risks may impact capital resources.

COMMITMENTS AND CONTINGENCIES

As part of its normal business, the Company entered into arrangements and incurred obligations that will impact the Company's future operations and liquidity. The principal commitments of the Company are as follows:



Six Twelve Months
Months --------------------------
($000's) 2006 2007 2008 2009 2010
------------------------------------------------------------------------
------------------------------------------------------------------------

Office and equipment leases 166 292 403 427 420
------------------------------------------------------------------------
------------------------------------------------------------------------

 


In September 2005, the Company entered into a crude oil costless collar for 15,000 barrels per month from January 1, 2006 to December 31, 2006. The transaction consisted of the purchase of a $50.00 per barrel dated Brent put (floor) and a $77.93 per barrel dated Brent call (ceiling).

Upon the determination that proved recoverable reserves are 40 million barrels or greater for Block S-1, Yemen, the Company will be required to pay a finders' fee to third parties in the amount of $281,000.

Pursuant to the Company's farm-in agreement on the Nuqra Concession in Egypt, the Company is committed to spend $6 million before July 1, 2009 to earn its 50% working interest. As at June 30, 2006, the Company has met this commitment. As part of this commitment the Company issued a $2 million letter of credit on July 8, 2004 (reduced to $745,000 in March 2006) to a division of the Ministry of Oil (Ganoub El Wadi Holding Petroleum Company) which expires on February 14, 2007. This letter of credit is secured by a guarantee granted by Export Development Canada. Subsequent to the quarter end, the Company entered into the first three year extension period which requires the completion of a two well drilling program with a minimum expenditure of $4.0 million over a period of three years. As part of this extension, the Company issued a $4.0 million letter of credit (expiring March 4, 2010) to guarantee the Company's performance under the extension period. This letter of credit is secured by a guarantee granted by Export Development Canada in the amount of $2.4 million representing the Company's share of the $4 million.

Pursuant to the PSA for Block 72, Yemen, the Contractor (Joint Venture Partners) has a minimum financial commitment of $4 million ($1.32 million to TransGlobe) during the first exploration period of 30 months (expiring January 12, 2008) for exploration work consisting of seismic acquisition (completed) and two exploration wells (planned for Q-4 2006 to Q-1 2007).



Consolidated Statements of Income and Retained Earnings (Deficit)

(Unaudited - Expressed in thousands of U.S. Dollars)

Three Months Ended Six Months Ended
June 30 June 30
2006 2005 2006 2005
------------------------------------------------------------------------

REVENUE
Oil and gas sales, net of
royalties $ 18,600 $ 11,778 $ 33,908 $ 25,322
Unrealized loss on commodity
contracts (Note 6) (30) - (217) -
Other income 74 4 124 9
------------------------------------------------------------------------
18,644 11,782 33,815 25,331
------------------------------------------------------------------------

EXPENSES
Operating 2,793 2,371 4,627 4,822
General and administrative 951 525 1,707 1,258
Stock-based compensation 314 99 588 450
Foreign exchange loss (gain) 70 1 72 (6)
Depletion, depreciation and
accretion 4,838 3,768 8,668 7,702
------------------------------------------------------------------------
8,966 6,764 15,662 14,226
------------------------------------------------------------------------

Income before income taxes 9,678 5,018 18,153 11,105
------------------------------------------------------------------------
Income taxes - future (100) (149) 30 58
- current 2,532 1,693 4,020 3,067
------------------------------------------------------------------------
2,432 1,544 4,050 3,125
------------------------------------------------------------------------

NET INCOME 7,246 3,474 14,103 7,980

Retained earnings (deficit),
beginning of period 26,022 3,821 19,165 (685)
------------------------------------------------------------------------
RETAINED EARNINGS, END OF PERIOD $ 33,268 $ 7,295 $ 33,268 $ 7,295
------------------------------------------------------------------------
------------------------------------------------------------------------
Net income per share (Note 5)
- Basic $ 0.12 $ 0.06 $ 0.24 $ 0.14
- Diluted $ 0.12 $ 0.06 $ 0.23 $ 0.13
------------------------------------------------------------------------
------------------------------------------------------------------------

See accompanying notes to these interim consolidated financial
statements.


Consolidated Balance Sheets

(Unaudited - Expressed in thousands of U.S. Dollars)

June 30, 2006 December 31, 2005
------------------------------------------------------------------------

ASSETS
Current
Cash and cash equivalents $ 16,678 $ 12,221
Accounts receivable 7,107 7,414
Oil inventory - 436
Prepaid expenses 615 463
Unrealized commodity contracts (Note 6) - 83
------------------------------------------------------------------------
24,400 20,617
------------------------------------------------------------------------
Property and equipment
Republic of Yemen 34,744 30,898
Canada 38,295 30,261
Arab Republic of Egypt 6,443 2,512
------------------------------------------------------------------------
79,482 63,671
Future income tax assets 1,934 1,886
Deferred financing costs - 112
------------------------------------------------------------------------
$ 105,816 $ 86,286
------------------------------------------------------------------------
------------------------------------------------------------------------

LIABILITIES
Current
Accounts payable and accrued
liabilities $ 13,637 $ 11,146
Unrealized commodity contracts (Note 6) 134 -
------------------------------------------------------------------------
13,771 11,146
Asset retirement obligations (Note 3) 1,947 1,503
------------------------------------------------------------------------
15,718 12,649
------------------------------------------------------------------------

Subsequent event (Note 8)

SHAREHOLDERS' EQUITY
Share capital (Note 4) 49,234 48,922
Contributed surplus 2,358 1,908
Cumulative translation adjustment 5,238 3,642
Retained earnings 33,268 19,165
------------------------------------------------------------------------
90,098 73,637
------------------------------------------------------------------------

$ 105,816 $ 86,286
------------------------------------------------------------------------
------------------------------------------------------------------------

See accompanying notes to these interim consolidated financial
statements.


Consolidated Statements of Cash Flows

(Unaudited - Expressed in thousands of U.S. Dollars )
Three Months Ended Six Months Ended
June 30 June 30
2006 2005 2006 2005
------------------------------------------------------------------------
------------------------------------------------------------------------
CASH FLOWS RELATED TO THE
FOLLOWING ACTIVITIES:

OPERATING
Net income $ 7,246 $ 3,474 $ 14,103 $ 7,980
Adjustments for:
Depletion, depreciation and
accretion 4,838 3,768 8,668 7,702
Stock-based compensation 314 99 588 450
Future income taxes (100) (149) 30 58
Amortization of deferred
financing charges 37 71 112 141
Unrealized loss on commodity
contracts (Note 6) 30 - 217 -
Settlement of asset retirement
obligations (9) - (65) -
Changes in non-cash working
capital 2,481 (277) 1,999 1,795
------------------------------------------------------------------------
14,837 6,986 25,652 18,126
------------------------------------------------------------------------

FINANCING
Issue of common shares for cash 65 502 209 714
Deferred financing costs - - - (2)
Changes in non-cash working
capital - - - (24)
------------------------------------------------------------------------
65 502 209 688
------------------------------------------------------------------------

INVESTING
Exploration and development
expenditures:
Republic of Yemen (5,650) (4,184) (8,669) (6,674)
Canada (5,171) (3,895) (9,571) (4,807)
Arab Republic of Egypt (877) (526) (3,944) (764)
Changes in non-cash working
capital 873 862 810 (4,298)
------------------------------------------------------------------------
(10,825) (7,743) (21,374) (16,543)
------------------------------------------------------------------------

Effect of foreign exchange on
cash and cash equivalents (57) (21) (30) (29)
------------------------------------------------------------------------

NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 4,020 (276) 4,457 2,242
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 12,658 7,506 12,221 4,988
------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS,
END OF PERIOD $ 16,678 $ 7,230 $ 16,678 $ 7,230
------------------------------------------------------------------------
------------------------------------------------------------------------

Supplemental Disclosure of Cash
Flow Information:
Cash interest paid $ - $ - $ 8 $ -
Cash taxes paid - Republic of
Yemen $ 2,532 $ 1,693 $ 4,020 $ 3,067
------------------------------------------------------------------------
------------------------------------------------------------------------

See accompanying notes to these interim consolidated financial
statements.

 


Notes to the Consolidated Financial Statements

(Unaudited -- Expressed in U.S. Dollars)

1. Basis of presentation

The interim consolidated financial statements include the accounts of TransGlobe Energy Corporation and subsidiaries ("TransGlobe" or the "Company") for the three month and the six month periods ended June 30, 2006 and 2005 and are presented in accordance with Canadian generally accepted accounting principles on the same basis as the audited consolidated financial statements as at and for the year ended December 31, 2005, except as outlined in Note 2. These interim consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto in TransGlobe's annual report for the year ended December 31, 2005. Interim results are not necessarily indicative of the results expected for the fiscal year. In these interim consolidated financial statements, unless otherwise indicated, all dollars are expressed in United States (U.S.) dollars. All references to US$ or to $ are U.S. dollars and references to C$ are to Canadian dollars.

2. Changes in accounting policies

Non-monetary transactions

Effective January 1, 2006, the Canadian Institute of Chartered Accountants (CICA) Section 3831 "Non-Monetary Transactions" was adopted by the Company which replaced Section 3830 of the same name. The standard, which harmonizes Canadian generally accepted accounting principles with the United States Financial Accounting Standards Board (FASB) Statement 153 Exchanges of Non-Monetary Assets, requires that all non-monetary transactions are measured based on fair value unless the transaction lacks commercial substance or is an exchange of product or property held for sale in the ordinary course of business. A transaction is determined to have commercial substance if it causes an identifiable and measurable change in the economic circumstances, or expected cash flows, of the entity. The guidance was effective for all non-monetary transactions initiated in periods beginning on or after January 1, 2006.

Implicit variable interests

Effective January 1, 2006, Emerging Issues Committee (EIC) Abstract 157 "Implicit Variable Interests" was adopted by the Company. The Abstract harmonizes Canadian generally accepted accounting principles with the United States FASB Staff Position (FSP) FIN 46®-5 Implicit Variable Interests. Implicit variable interests are implied financial interests in an entity and act the same as an explicit variable interest except they involve the absorbing and or receiving of variability indirectly from the entity rather than directly. The adoption of EIC Abstract 157 had no effect on the Company's consolidated financial statements.

Conditional asset retirement obligations

Effective April 1, 2006, EIC Abstract 159 "Accounting for Conditional Asset Retirement Obligations" was adopted by the Company. The Abstract, which is harmonized with the equivalent United States FASB Interpretation (FIN) 47 Accounting for Conditional Asset Retirement Obligations, clarifies the accounting for conditional asset retirement obligations where the timing or method of settlement are conditional on a future event that may or may not be within the control of the entity. Although these uncertainties affect the fair value of the liability, they do not relieve an entity from the requirement to record a liability, if it can be reasonably determined. The adoption of EIC Abstract 159 had no effect on the Company's consolidated financial statements.

3. Asset retirement obligations

The following table presents the reconciliation of the beginning and ending obligations associated with the retirement of oil and gas properties:



(000's)
------------------------------------------------------------------------
Asset retirement obligations, December 31, 2005 $ 1,503
Obligations incurred during period 380
Obligations settled during period (65)
Accretion 59
Foreign exchange loss 70
------------------------------------------------------------------------
Asset retirement obligations, June 30, 2006 $ 1,947
------------------------------------------------------------------------
------------------------------------------------------------------------

 


At June 30, 2006, the estimated total undiscounted amount required to settle the asset retirement obligations was $2,750,000. These obligations will be settled at the end of the useful lives of the underlying assets, which currently extend up to nine years into the future. This amount has been discounted using a credit-adjusted risk-free interest rate of 6.5%.

4. Share capital

The Company is authorized to issue unlimited number of common shares with no par value.



Continuity of common shares (000's) Shares Amount
------------------------------------------------------------------------
Balance, December 31, 2005 58,473 $ 48,922
Stock options exercised 210 209
Transfer from contributed surplus related to
stock options exercised 103
------------------------------------------------------------------------
Balance, June 30, 2006 58,683 $ 49,234
------------------------------------------------------------------------
------------------------------------------------------------------------

Weighted
Average
Number of Exercise
Continuity of stock options (000's) Options Price
------------------------------------------------------------------------
Balance, December 31, 2005 3,361 $ 2.76
Granted 24 4.53
Exercised (210) 0.92
Cancelled (33) 6.10
------------------------------------------------------------------------
Balance, June 30, 2006 3,142 $ 2.86
------------------------------------------------------------------------
------------------------------------------------------------------------

 


Stock-based compensation

Compensation expense of $588,000 has been recorded in the consolidated statements of income and retained earnings (deficit) in the six months ended 2006 (2005 - $450,000). The fair values of all common stock options granted are estimated on the date of grant using the lattice-based binomial option pricing model in 2006, and the Black-Scholes option-pricing model prior to 2006. The weighted average fair value of options granted during 2006 and the assumptions used in their determination are noted below:



------------------------------------------------------------------------
Weighted average fair market value per option (Cdn$) 2.23
Risk-free interest rate (percent) 4.3
Expected life (years) 5
Expected volatility (percent) 50
Expected dividend yield (percent) 0
Early exercise factor (percent) 25
Early exercise (Year 1/Year 2/Year 3/
Year 4/Year 5) (0%/10%/20%/30%/40%)
------------------------------------------------------------------------
------------------------------------------------------------------------


5. Per share amounts

In calculating the net income per share basic and diluted, the following
weighted average shares were used:

Three months ended Six months ended
June 30 June 30
(000's) 2006 2005 2006 2005
------------------------------------------------------------------------
Weighted average number of shares
outstanding 58,671 57,741 58,599 57,497
Shares issuable pursuant to stock
options 2,566 3,124 3,483 3,321
Shares to be purchased from
proceeds of stock options under
treasury stock method (673) (781) (1,469) (742)
------------------------------------------------------------------------
Weighted average number of diluted
shares outstanding 60,564 60,084 60,613 60,076
------------------------------------------------------------------------
------------------------------------------------------------------------

 


The treasury stock method assumes that the proceeds received from the exercise of "in-the-money" stock options are used to repurchase common shares at the average market price. In calculating the weighted average number of diluted common shares outstanding for the three and six month periods ended June 30, 2006, we excluded 1,109,000 and 275,000 options respectively (2005 -- 80,000; 40,000) because their exercise price was greater than the period average common share market price in this period.

6. Financial instruments

The Company has entered into various financial derivative contracts and physical contracts to manage fluctuations in commodity prices in the normal course of operations.

In September 2005, the Company entered into a crude oil costless collar for 15,000 barrels per month from January 1, 2006 to December 31, 2006. The transaction consisted of the purchase of a $50.00 per barrel dated Brent put (floor) and a $77.93 per barrel dated Brent call (ceiling).

The estimated fair value of unrealized commodity contracts is reported on the consolidated balance sheet with any change in the unrealized positions recorded to income. The fair values of these transactions are based on an approximation of the amounts that would have been paid to or received from counterparties to settle the transactions outstanding as at June 30, 2006 with reference to forward prices and market values provided by independent sources. The actual amounts realized may differ from these estimates.



7. Segmented information

Three months ended Six months ended
June 30 June 30
------------------------------------------------------------------------
(000's) 2006 2005 2006 2005
------------------------------------------------------------------------
Oil and gas sales, net of royalties
Republic of Yemen $ 15,121 $ 9,656 $ 27,378 $ 21,011
Canada 3,479 2,122 6,530 4,311
------------------------------------------------------------------------
18,600 11,778 33,908 25,322
------------------------------------------------------------------------
Operating expenses
Republic of Yemen 1,961 1,901 3,174 3,952
Canada 832 470 1,453 870
------------------------------------------------------------------------
2,793 2,371 4,627 4,822
Depletion, depreciation and
accretion
Republic of Yemen 2,976 3,082 5,278 6,327
Canada 1,853 685 3,377 1,374
Arab Republic of Egypt 9 1 13 1
------------------------------------------------------------------------
4,838 3,768 8,668 7,702
------------------------------------------------------------------------
Segmented income before the following:
Republic of Yemen 10,184 4,672 18,926 10,731
Canada 794 967 1,700 2,067
Arab Republic of Egypt (9) - (13) -
------------------------------------------------------------------------
10,969 5,639 20,613 12,798
Other income 74 4 124 9
------------------------------------------------------------------------
11,043 5,643 20,737 12,807
------------------------------------------------------------------------
Unrealized loss on commodity
contracts 30 - 217 -
General and administrative 951 525 1,707 1,258
Stock-based compensation 314 99 588 450
Foreign exchange loss (gain) 70 1 72 (6)
Income taxes 2,432 1,544 4,050 3,125
------------------------------------------------------------------------
Net income $ 7,246 $ 3,474 $ 14,103 $ 7,980
------------------------------------------------------------------------
------------------------------------------------------------------------

 


8. Subsequent events

Pursuant to the Nuqra Concession Agreement in the Arab Republic of Egypt, the Company and its partners have entered into the first three year extension period which requires the completion of a two well drilling program with a minimum expenditure of $4.0 million over a period of three years. As part of this extension, the Company made the mandatory relinquishment of 25% of the Block and issued a $4.0 million letter of credit (expiring March 4, 2010) to guarantee the Company's performance under the extension period. This letter of credit is secured by a guarantee granted by Export Development Canada in the amount of $2.4 million representing the Company's share of the $4 million.

Also the Company has entered into an Amended and Restated Credit Agreement in the amount of $55 million, with the initial borrowing base established at $25 million, expiring July 18, 2009. The credit agreement bears interest at the Euro dollar rate plus three percent and is secured by a first floating charge debenture over all assets of the Company, a general assignment of book debts and certain covenants, among other things.

The above includes certain statements that may be deemed to be "forward-looking statements" within the meaning of the U.S. Private Securities Litigation Reform Act of 1995. All statements in this release, other than statements of historical facts, that address future production, reserve potential, exploration drilling, exploitation activities and events or developments that the Company expects are forward-looking statements. Although TransGlobe believes the expectations expressed in such forward-looking statements are based on reasonable assumptions, such statements are not guarantees of future performance and actual results or developments may differ materially from those in the forward-looking statements. Factors that could cause actual results to differ materially from those in forward-looking statements include oil and gas prices, well production performance, exploitation and exploration successes, continued availability of capital and financing, and general economic, market or business conditions.



TRANSGLOBE ENERGY CORPORATION

s/s Lloyd W. Herrick


Lloyd W. Herrick,
Vice President & COO

 

TransGlobe Energy Corporation
Ross G. Clarkson
President & C.E.O.
(403) 264-9888
(403) 264-9898 (FAX)

or

TransGlobe Energy Corporation
Lloyd W. Herrick
Vice President & C.O.O.
(403) 264-9888
(403) 264-9898 (FAX)
Email: trglobe@trans-globe.com
Website: www.trans-globe.com

or

Executive Offices
#2500, 605 - 5th Avenue, S.W.
Calgary, AB T2P 3H5

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